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Value investing is one of the best investment strategies that individual investors can pursue to beat the market in the long run. Even though the stock market was pretty stagnant during the past 10 years, value investors were able to return around 7 percent per year.

We think investors could even do better by focusing on value stocks that hedge funds find attractive and invest significant sums. Hedge funds leave less to chance than most investors. They go great lengths to get an "edge" over ordinary investors. Hedge fund managers also have the resources to do extensive research on public companies and they have access to experts who can guide them. We compiled the holdings of 300+ hedge funds and picked their favorite value stocks. We obtained price-to-earnings and price-to-book value ratios from Google Finance. The stocks in this list trade below their book value. Here are hedge funds' most favorite value stocks:

Company

Ticker

P/B Ratio

% Owned

Value (x1000)

Assured Guaranty Ltd.

AGO

0.81

29.4%

904,505

Validus Holdings, Ltd.

VR

0.89

20.2%

638,080

Hartford Financial Services

HIG

0.6

14.3%

1,634,616

Everest Re Group, Ltd.

RE

0.77

13.4%

635,990

Allied World Assurance Co

AWH

0.76

13.0%

295,352

Transatlantic Holdings, Inc.

TRH

0.67

12.7%

359,736

Legg Mason, Inc.

LM

0.87

10.5%

510,760

Loews Corporation

L

0.94

10.0%

1,682,974

Capital One Financial Corp.

COF

0.93

8.6%

2,090,296

Citigroup Inc.

C

0.73

8.5%

9,850,069

Cincinnati Financial Corp

CINF

0.97

8.1%

392,665

Unum Group

UNM

0.92

7.1%

558,982

Assurant, Inc.

AIZ

0.79

7.0%

245,668

Alterra Capital Holdings Ltd.

ALTE

0.86

6.9%

164,424

Morgan Stanley

MS

0.76

6.4%

2,285,113

KeyCorp

KEY

0.89

6.3%

489,875

Computer Sciences Corp

CSC

0.82

6.2%

377,176

MetLife, Inc.

MET

0.89

6.1%

2,767,051

Erie Indemnity Company

ERIE

0.56

5.4%

185,884

Fifth Third Bancorp

FITB

0.99

4.8%

547,361

Goldman Sachs Group, Inc.

GS

1

4.2%

2,992,909

JPMorgan Chase & Co.

JPM

0.99

4.2%

7,027,379

CME Group Inc.

CME

0.94

3.6%

668,075

Lincoln National Corp

LNC

0.71

3.5%

312,399

Reinsurance Group of America

RGA

0.91

3.5%

161,840

Axis Capital Holdings Limited

AXS

0.72

2.9%

123,256

ACE Limited

ACE

1

2.4%

558,650

American Financial Group

AFG

0.83

1.9%

68,764

The Allstate Corporation

ALL

0.88

1.7%

278,180

Prudential Financial, Inc.

PRU

0.95

1.7%

494,907

Great Plains Energy Inc

GXP

0.98

1.6%

46,471

Bunge Limited

BG

0.94

0.8%

85,496

American National Insurance

ANAT

0.57

0.7%

15,335

CNA Financial Corporation

CNA

0.74

0.6%

46,114

Deutsche Bank AG (USA)

DB

0.77

0.0%

1,303

Assured Guaranty is the most popular value stock among hedge funds. Nearly 30% of its outstanding shares are owned by the 300+ funds Insider Monkey tracks. Collectively these funds invested $904 Million at the end of March. Wilbur Ross had $239 Million, Ric Dillon's Diamond Hill Capital had $101 Million, and Louis Bacon's Moore Global Investments had $99 in AGO at the end of March. There were 18 other hedge funds with AGO holdings.

Validus Holdings is the second most popular value stock with 20.2% hedge fund ownership. The stock has a PE ratio of 12, PB ratio of 0.89, and a dividend yield of 3.1%. There were 20 funds with VR holdings at the end of March. Steven Klinsky's New Mountain Capital and Robert Pitts' Steadfast Capital had the largest holdings in VR.

We ranked value stocks based on hedge funds' ownership percentage. However, this isn't fair to mega-cap stocks with $100+ billion in market value. If we had ranked based on dollar amount invested in each stock, Citigroup would have been the most popular stock. There were 96 funds with Citigroup holdings at the end of March. They invested a total of $9.9 Billion in C. John Paulson's Paulson & Co had more than $1.8 Billion in Citigroup at the end of March. Bruce Berkowitz's Fairholme and Randall Smith's Alden Global Capital had more than $1 billion in C as well. Bill Ackman's Pershing Square had nearly $650 Million in C.

JP Morgan was the second most popular value stock in terms of dollar amount invested. There were 83 hedge funds with JPM holdings at the end of March. These hedge funds collectively invested more than $7 Billion. Steve Heinz's Lansdowne, Jonathan Jacobson's Highfields Capital, and Andreas Halvorsen's Viking Global are among the hedge funds with huge JPM positions.

We believe investors can achieve above market returns in the long run by investing in these value stocks. Investing in these stocks might not provide enough diversification though. A majority of these stocks are financials.

Source: Hedge Funds Are Bullish About These Value Stocks